Climate change & forex trading - the effects of COP26

Climate change & forex trading – the effects of COP26

The Climate Change Conference of the Parties (COP) is the gathering of the world’s major leaders, with this year’s being the 26th event. 2021 will see the COP26 take place between 31st October and 12th November, this time with Glasgow acting as the host city.

The summit focuses on the environment, with attendance from principal representatives of 197 countries; all of which signed the United Nations Framework Convention on Climate Change (UNFCCC) in 1994. This was the initial agreement that entailed an international effort to combat global warming and climate change, with the most prominent aim being the stabilisation of greenhouse gas admissions, to prevent dangerous levels impacting the global climate system.

With such a pinnacle moment in the political, environmentalist and economic calendar, let’s explore further what we can expect of the COP26, and how the outcomes of the conference will have an effect on the financial market.

What will be discussed?

As the conference has been developed as a result of the UNFCCC, understandably the greenhouse gas emissions reported by each country is the conversational starting point for the event’s debates. There will be an assessment of any actions taken to combat this crisis, as well as a discussion on the progress towards the procedures to limit climate change.

The target for the countries across the globe was to keep the limit of global temperature increases to a maximum of 1.5°C. Therefore, the incentives to achieve this are to be discussed, such as full stoppage of coal use, an end to deforestation, investment in renewable energy, and the switch to fully electric vehicles.

The main bulk of the COP26 will consist of negotiations between the countries, aiming to come to a conclusive agreement on how each nation will tackle the amount of greenhouse gas emissions, with the year 2030 as an initial deadline for review, and 2050 the end goal to achieve a ‘net-zero’ position— whereby there will no longer be any greenhouse gases emitted into the atmosphere. Alongside this, there is a scheduled series of climate talks and events for both delegates and the general public to attend in Glasgow.

How does this affect forex trading?

Understandably, as the COP26 involves the important decisions of the world’s governments and key stakeholders, the outcome of these talks to tackle the climate crisis will have a significant impact on the financial markets, and in particular the foreign exchange (forex).

In order to fully understand the effects of the COP26, it is vital to learn more about forex trading and the factors that impact the movement of currency pairs. Macroeconomic data and political events, such as the COP26, are heavily influential on the forex market. This is because this data and types of events, are detrimental when it comes to the strength of the relevant economies.

In the case of the COP26, let’s explore the value of the British pound (GBP). In terms of the UK, its estimated that around 10 tonnes of these climate-warming gases are emitted by each individual every year, which is shockingly, double the global average. In order to adhere to the agreement of the COP26, this would need to be cut to zero by 2050.

So, how can the UK achieve this? There would have to be significant investment in the country’s infrastructure, including an upgrade to the nation’s transport, the heating and energy provided to consumers, and a number of buildings up and down the UK. For this to be completed, there would have to be increased amount of government spending, with an estimated extra £50 billion needed. This could affect interest rates, the level of GDP and the overall health of the UK economy, which in turn would impact the rate of the GBP when it comes to forex trading.